Jonathan Clements's Blog, page 36

Going too far with FIRE: The downside of being in the financial advice business – RDQ

I always thought the glowing stories of FIRE folks were a bit dodgy. Much of the time they aren’t even retired in the traditional sense. Sometimes they go too far sharing their acquired wisdom for cash.

I followed one blogger for several years. She shared her frugal ways, extreme in my view like buying her two-year olds shoes in a second hand thrift shop. She wrote a book, gained a lot of publicity, was featured in news articles and gave advice. 

She answered questions on her blog, invited readers to send in case studies which she analyzed and then provided advice. In the past, when I attempted to post a comment questioning her advice, they never appeared. 

Then based on her experience, she began providing advice for a fee, she was now a financial consultant. She changed the blog to accommodate her new service. 

A year ago I noticed there were no updates on the blog, posts are now a year old. She still advertised for clients, but it was otherwise silent. Recently I clicked on the “hire me” button and it said she was not accepting new clients at this time. 

What happened to the famous Mrs. Frugalwoods who had gained widespread publicity for her financial acumen writing extensively about how to save money and live a good life retired in your 30s? She just seemed to disappear. 

I finally found the answer. She ran afoul of Vermonts security laws. Specifically she was charged in a consent order.

 “WHEREAS, as a result of the Department's review, the Department has concluded that Respondent violated the Securities Act by providing investment advice for compensation in Vermont without registering as an investment adviser or investment adviser representative and without qualifying for any exemption from registration.” She agreed to a fine of $7,800. The order states no-one was harmed.

It was providing her financial advice for (pretty hefty) compensation that did her in.

My cynical mindset asks, if her household (husband and two young children) FIRE worked so well, why did she need to sell her services? 

Here is the dream she is promoting on her blog. 

“By taking control of our money, my husband and I were able to pursue our dream of moving to a homestead in rural Vermont. He retired early, and I left my unfulfilling job to focus on helping people like you. Let me show you how to make your money create the life you want.”

A lot of us do our best to take control of our money, but don’t drop out in our 30s and then present a lifetime of knowledge and experience to others. 

At least when I pontificate it is based on 80 plus years of dealing with the vicissitudes of life - mine and others. 

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Dual Momentum?

I recently posted on the forum (thank you for the responses) about getting out of the market, but that wasn't the full story....

We've been invested 100% in stocks for a number of years and have reaped the rewards, however, general anxiety and market fluctuations don't mix. I hated giving up the gains by migrating to a 60/40 (I am a victim to recency bias) and after reading Gary Antonacci's Dual Momentum, I thought I had found the solution to my quandary.

DM strategy told me to sell the stocks in March or perhaps April, but I didn't get back in since the strategy calls for reviewing annual returns monthly and the market had climbed dramatically. In that time, I've realized that DM has not cooled my emotions one bit.

My question to all you erudite investors who have read Antonacci's Dual Momentum strategy, "What are your thoughts?" I'll sheepishly admit that I was unable to backtest the strategy and there is minimal research.

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Mr. Quinn would be nervous. Would you be?

Towards the bottom of Mr. Quinn's lengthy thread on spreadsheets and budgets I mentioned that I expect to spend a bit under 1% of my portfolio this year. Dick said that he would feel nervous in that situation. I am not currently feeling nervous, but since that percentage will increase over time, maybe I should be. I thought I would ask my fellow contributors what they thought.

Some background: I agree with Dick in seeing my income as just Social Security, with COLA, and a company pension, with no COLA. In fact, the pension was frozen when I reached 30 years service in 2000, and has lost value ever since. I expect my SS to overtake it in a couple of years. It's true, that at almost 78 I have been taking RMDs for several years, and the IRS considers that to be income, but since, after QCDs, I simply move the funds from my IRA to my brokerage account, I don't. Equally, the interest and dividends in my brokerage account are on automatic reinvestment.

As I expect my medical costs to increase above the rate of inflation, and the monthly fees for my CCRC will probably do the same, I will need more than 1% from my portfolio in future years. I should mention that the portfolio exists solely to make up for the lack of a COLA on my pension. Leaving a legacy would be nice, but as I have no biological children it is not a priority. 

If I take the current value of my portfolio (which has increased since the last time I looked), subtract a guesstimate $50,000 for what will likely be my last car and divide by 22 (years to 100), the result is 11.5% lower than my annual SS plus pension, before taxes. In other words, I believe I could nearly double my gross income without a risk of running out of money.

No doubt Dick would still feel nervous, but should I?

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A Lesson in Accountability

I worked up quite an appetite at the gym late this morning. Luckily there is a great little diner just 2 doors down in the same strip. I’ve always enjoyed great food and friendly service at the Sunrise Skillet, but today was a little different, as service was a tad slow. Honestly I was preoccupied perusing my smart phone and barely aware of the time. Eventually my waitress, Britt, came to my booth, empty handed, telling me that she was paying for my lunch because she forgot to put in the order. 

It’s always nice when things go precisely as they should, but it’s not realistic to think that mistakes will never be made. What impresses me is the manner in which people deal with their mistakes. In this case Brittany owned her screw-up, she really felt bad about it, made no excuses, and was willing to dip into her pocket to make things right. Brittany earned my loyalty for life. No way was I going to let her buy my lunch. After a little back and forth over who’s paying, she reluctantly took my credit card. 

Wouldn’t it be nice if all businesses had the same integrity and work ethic as this age 20-something waitress?

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Cryptocurrency in a 401(k)?

MarketWatch posted that the Trump administration is rescinding Biden administration's guidance that discouraged cryptocurrency investing by 401(k) plans.

The 2022 guidance directed plan fiduciaries to exercise “extreme care” before adding cryptocurrency to investment menus. That caution has now been removed.

I’m thinking removing urging “extreme care” for 401k plans is not such a good idea. Is the 401k the place for such an investment?

 How many people actually understand cryptocurrency? Not me 

I can just see some employees (like the ones taking the financial literacy test) jumping on the bandwagon if they have the opportunity.

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Cryptocurrency in a 401k?

MarketWatch posted that The Trump administration is rescinding Biden administration guidance that discouraged cryptocurrency investing by 401(k) plans.

The 2022 guidance directed plan fiduciaries to exercise “extreme care” before adding cryptocurrency to investment menus. That caution has now been removed.

I’m thinking removing urging “extreme care” for 401k plans is not such a good idea. Is the 401k the place for such an investment?

 How many people actually understand cryptocurrency? Not me 

I can just see some employees (like the ones taking the financial literacy test) jumping on the bandwagon if they have the opportunity.

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Getting Others Going

Want to help a young person get started on a lifetime of investing? Hear all about the Jonathan Clements Getting Going on Savings Initiative on this podcast hosted by Rick Ferri. My fellow guests on the podcast were Morningstar's Christine Benz and The Wall Street Journal's Jason Zweig. Please give a listen—and please consider donating. One way to donate: Buy copies of  The Best of Jonathan Clements , a collection of my Wall Street Journal columns. All royalties go toward the savings initiative.

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AARP tax calculator changed to 2025

AARP updated their 1040 free Tax Estimator for 2025 today. The calculator is before any changes in the H.R. 1 bill passed by the House recently.

One easy work around to see how the proposed law change may impact your 2025 taxes is plugging into the AARP calculator itemized deductions - interest the H.R. 1 additional $4K and $2K (if you are filing MFJ status) if you think the additional senior standard amounts will become law in 2025 plus your standard deduction for 2025.

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I’m Guessing Most HD Readers Will Score 100%

I found this financial literacy quiz this morning. It comes from the Stanford Center on Longevity. According to the site, only 29% of American adults can correctly answer the three questions in the quiz.

I'm guessing most HumbleDollar readers will Score 100%. I did.

Take the quiz.

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Are taxes too high? I don’t think so

My perception is Americans have become obsessed with taxes. They complain loudly about high taxes. Some vocal seniors don’t think they should pay property taxes or income taxes on Social Security or extra premiums for Medicare (not actually taxes).  

There seems a general lack of understanding of what taxes provide.  The tax collector has been vilified throughout history. Our Country was founded as the result of taxation. 

Paul in Romans 13:1-7, explicitly mentions paying taxes: "This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. Give everyone what you owe him: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor."

Making the connection between taxes and what they provide is often misunderstood. Take schools and teacher pay as an example. I’m not criticizing teachers, but I have been criticized because I say teachers are not underpaid all things considered. 

Teachers typically receive community support for higher pay and benefits, but no connection is made that typically 50% of the property tax bill goes to schools and 50% of that is pay and benefits. Nor is it mentioned that the retirement benefits teachers typically receive are far better than any received by the taxpayers footing the bill. 90% of teachers have pensions. We simply don’t make such connections. 

Taxes come in many forms, some income, some consumption or use based. For my money the most egregious tax is state lotteries because they target the lower income and less educated and thus are very regressive. 

Many Europeans, particularly in Northern and Western Europe, tend to accept higher tax rates in exchange for comprehensive public services. These services often include universal healthcare, extensive social security, affordable education, robust public transportation, and generous parental leave.

The concept of a "social contract" is strong, where citizens pay taxes as a contribution to the community, expecting a fair return in public goods and services.

Surveys indicate that while a majority in some European countries (e.g., France, Germany) feel taxes are too high, this sentiment often changes when linked to cuts in government spending or increased public debt.

Do Americans see it that way? Not the most vocal ones anyway. I doubt Americans ever look at their real effective federal income tax rate. 

Bottom 50%: Paid an average rate of about 3.7% in 2022.
All Taxpayers (Average): Around 14% - 14.5% in recent years.
Top 1%: Paid an average rate of about 23.1% - 26.1% in 2022.

Divide your taxes by your total income from all sources, taxable or not and multiply by 100 to see your real effective tax rate. 

Americans complain loudly about their health insurance premiums. In 2024, the average annual health insurance premium for family coverage was around $25,572. Millions of Americans receive  subsidies to help pay those premiums- from taxes or deficits. In other countries it’s all or mostly a community cost via taxes, but it’s still a cost. 

Given federal spending is $2 trillion a year more than its income, I find it hard to conclude taxes are too high. 

And before jumping on the unnecessary spending train, that ain’t the problem. It’s more like households with a desired lifestyle supported by credit cards. 

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